Has a Bear Market Started?

The chart maps out a possible Elliott Wave interpretation of the move up since last summer. It's pretty clear if you look at the waves and technical indicators that the current correction is unlikely to be complete. We should expect at least another downwave comparable to the one that started in late February. The real question is: Would that be the end of the correction or has a more extensive bear market started? I've been looking for a 20% correction in the stock market to end the rally that started in late 2002, which has turned out to be one of the longest periods in stock market history without a 20% correction.

From a fundamental perspective there are plenty of signs of weakness in the US and global economy but nothing yet is pointing to a severe recession rather than a mid-cycle slowdown of the type we saw in the mid-80s and mid-90s. Even if there is a recession, recent US recessions have been very mild by historical standards. There is a trend to less and less volatility in the business cycle over time - with longer and longer expansions and milder and milder booms and busts. Looking at stock valuations, they seem fairly reasonable (though not cheap) given the low interest rate environment. Profits are at an all time high as a share of GDP in the US and have increased by more than ever in percentage terms since the last US recession. If a recession is coming profits will fall and so should stock prices but the Fed is likely to cut interest rates and inflation is contained. I just can't see an argument for a very steep fall in stock prices. I tend to be bearish but I am not a gloom and doom gold-bug type permabear. The economy does change over time and the past doesnt repeat itself in exactly the same way. We are in the middle of a massive global economic integration on a scale not seen since the late 19th century. Manufacturing is a smaller share of employment and GDP (but not of material production neccessarily - huge technological change has resulted in the price of manufactures falling relative to everything else) and governments and central banks know better how to control the economy than in the past.

From a technical perspective it depends where the wave in the chart above fits in the bigger cycle of things. It is rather short in time and amplitude compared to the rally wave that started in 2002 and maybe ended in late 2004. On the NASDAQ indices there was then clearly a correction lasting till July 2006 and then this current rally that has just ended. The bullish interpretation is that from 2002 to 2004 was wave 1 of the post dot.com bust bull market. Wave 2 played out in 2005-6 and the recent rally is the first wave of wave 3. Our current correction is then the second wave of wave 3 and could complete in a matter of weeks. Bearish e-wave scenarios look a lot less convincing in the US markets. The most obvious is that the recent rally was wave C of a corrective wave starting in 2002, which itself is part of a decade long triangle correction that started in 2000. But as I pointed out above this C wave would be rather small. Most non-US markets have clearly been in a bull market over these years. The weakness of the bull-case is that if the current correction does not take out last summer's low in the S&P 500 we will not see a 20% correction. Then the bull market that started in 2002 will turn out to be the longest in history. Are things really different this time?